Application for Further Review of Protest No. 2704-14-101666; First Sale; Wearing Apparel

H264968 May 8, 2018 OT:RR:CTF:VSP H264968 tmf CATEGORY: Valuation Port Director U.S. Customs and Border Protection 301 East Ocean Blvd., Suite 1400 Long Beach, California 90802 RE: Application for Further Review of Protest No. 2704-14-101666; First Sale; Wearing Apparel Dear Port Director: This is in response to an Application for Further Review (“AFR”) of Protest No. 2704-14-101666, dated November 12, 2014, filed by customs brokerage firm, GHY USA of Pembina, North Dakota, on behalf of the importer, Dimensions 100 Inc., dba Mondetta Clothing of Canada (hereinafter “importer”/“protestant”/ “Mondetta”). The protestant contests the denial of first sale valuation of the imported merchandise. The Port properly approved AFR in this instance. This protest decision is based upon our review of the protest submission and all accompanying documents. In addition, Counsel has requested confidential treatment be accorded to certain information submitted in connection with this matter. In consideration of the request and sufficient justification presented pursuant to 19 CFR 177.2(b)(7), this office will provide confidential treatment to certain information related to this matter. Information for which confidentiality is being accorded will be denoted in brackets in the confidential decision and will be redacted in any public version. FACTS:Protest 2704-14-101666 concerns an entry of certain ladies’ “knit strap back long bra shirts” in various colors entered May 23, 2013, and liquidated May 16, 2014. Mondetta’s website states that the company is principally engaged in the marketing and distribution of men’s and women’s apparel items, which are manufactured worldwide. According to counsel for Mondetta, Mondetta purchased and imported the wearing apparel from an unrelated Korean vendor, [XXXXX]. [XXX] purchased the apparel from a Vietnamese factory seller, [XXXXX] [XXX]. [XXX] and [XXX] are related parties for customs purposes pursuant to 19 U.S.C. § 1401a(g)(1). Counsel claims that the transaction value between [XXX] and [XXX] should have been used for purposes of valuation of the merchandise at issue. Counsel provided various documents in support of the protests. Some of the specific documents are: A Mondetta purchase order (#2283-001), dated February 26, 2013, listing the vendor as [XXX] in South Korea, with a ship-to address for export only to the retailer, [XXX], in Charlotte, North Carolina, USA. A purchase order #3Q130207-S16, dated March 5, 2013, from [XXX] to [XXX], with a ship-to address to [XXX], in Charlotte, North Carolina, USA, with the ultimate buyer listed as Mondetta. The goods are listed as “sold for export to the U.S. only.” Manufacturer’s invoice from [XXX] to [XXX], MON3Q130508-6, dated May 8, 2013, with the CPT Incoterm (“Carriage Paid To”). A commercial invoice #3Q130505-V006, dated May 8, 2013, in the amount of $24,838.20, issued to Mondetta on a FOB basis from [XXX] for merchandise to [XXXXX], in Charlotte, North Carolina, USA, made by [XXX], the manufacturer. Counsel provided [XXX]’s bank wire payment of $6,068.40 to [XXX] for cut, make and trim services as set forth in Invoice #MON3Q130508-6, dated May 8, 2013, which shows the CMP production term (cut, make and pack) of two styles of T-back long bras with medallion detail (1,908), and strap back detail long bras (1,812). Counsel provided overall operating profit margins for [XXX] and [XXX] for Style #[XXX] and Style #[XXX]. Protestant contends that as a result of a clerical error by brokerage GHY USA personnel, the entry was processed using the commercial invoice, but the entry should have been submitted under the first sale rule. As a result, a corrected 7501 was filed for the entry and a request for a refund in the amount of $791.33 was made. Counsel states that Mondetta sources its merchandise from various unrelated vendors and imports goods from [XXX] on a full-package basis and does not generally provide assists to [XXX]. The manufacturer [XXX] receives assists from the middleman [XXX]. In the event that assists were provided, counsel states that the value was declared to U.S. Customs and Border Protection (“CBP”). The majority of the imported merchandise was entered through the Ports of Los Angeles; Pembina, North Dakota; and Blaine, Washington. ISSUE: Whether the sale between [XXX], the middleman in Korea, and [XXX], its related manufacturer in Vietnam, is a bona fide sale for exportation to the U.S. that may be used for the entry at issue. LAW AND ANALYSIS:Merchandise imported into the United States is appraised in accordance with Section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. § 1401a). The preferred method of appraisement is transaction value, which is defined as the “price actually paid or payable for the merchandise when sold for exportation to the United States” plus certain statutory additions. 19 U.S.C. § 1401a(b)(1). Protestant seeks to utilize the transaction value of the sale between [XXX], the middleman in South Korea, and [XXX], the manufacturer in Vietnam, for purposes of the importation at issue. In Nissho Iwai American Corp. v United States, 16 C.I.T. 86, 786 F. Supp. 1002, reversed in part, 982 F. 2d 505 (Fed. Cir. 1992), the Court of Appeals for the Federal Circuit reviewed the standard for determining transaction value when there was more than one sale which may be considered as being a sale for exportation to the United States. The case involved a foreign manufacturer, a middleman, and a United States purchaser. The court held that the price paid by the middleman/importer to the manufacturer was the proper basis for transaction value. The court further stated that in order for a transaction to be viable under the valuation statute, it must be a sale negotiated at arm’s length, free from any non-market influences, and involving goods clearly destined for the United States. See also, Synergy Sport International, Ltd. v. United States, 17 C.I.T. 18 (1993). In accordance with the Nissho Iwai decision and our own precedent, we presume that transaction value is based on the price paid by the importer. In further keeping with the court’s holding, we note that an importer may request appraisement based on the price paid by the middleman to the foreign manufacturer in situations where the middleman is not the importer. However, it is the importer’s responsibility to show that the “first sale” price is acceptable under the standard set forth in Nissho Iwai, that is, the importer must present sufficient evidence that the alleged sale was a bona fide “arm’s length sale,” and that it was “a sale for export to the United States” within the meaning of 19 U.S.C. § 1401a. In Treasury Decision (T.D.) 96-87, dated January 2, 1997, the Customs Service (now CBP) advised that the importer must provide a description of the roles of the parties involved and must supply relevant documentation addressing each transaction that was involved in the exportation of the merchandise to the United States. The documents may include, but are not limited to purchase orders, invoices, proof of payments, contracts, and any additional documents (e.g. correspondence) that establishes how the parties deal with one another. The objective is to provide CBP with “a complete paper trail of the imported merchandise showing the structure of the entire transaction.” T.D. 96-87 further provides that the importer must also inform CBP of any statutory additions and their amounts. If unable to do so, the sale between the middleman and the manufacturer cannot form the basis of transaction value. In order to be able to use a first sale as a basis of appraisement, there must be a bona fide sale between [XXX] (the middleman) and [XXX] (the manufacturer of goods), and the goods must be clearly destined to the U.S. Counsel claims there was a bona fide arm’s length sale between [XXX] and [XXX]. Counsel provided [XXX]’s bank wire payment of $6,068.40 to [XXX] for cut, make and trim services as set forth in Invoice #MON3Q130508-6, dated May 8, 2013. In addition, counsel provided proof of various assist payments made to [XXX] from [XXX]. Invoice #MON3Q130508-6, dated May 8, 2013 from [XXX] to [XXX] indicates the CPT (“Carriage Paid To”) Incoterm. Counsel claims, based on the Incoterm, that the risk of loss passed to [XXX] once the goods were delivered to the port of export at Ho Chi Minh, Vietnam. From there, the risk of loss passed to [XXX] to Mondetta based upon the FOB Incoterm. Counsel submits that title passed with the risk of loss. With regard to whether the goods were clearly destined to the U.S., counsel provided evidence to support that the goods were “for the account of Mondetta”, as well as for export to retailers in the United States. See PO #3Q130207-S16, dated March 5, 2013 and Invoice #MON3Q130508-6, dated March 8, 2013. For example, from our review of the record, it is clear that the goods were being shipped to retailer [XXX] in the U.S. See Mondetta’s PO #2283-001, dated February 26, 2013 and [XXX]’s purchase order, issued March 3, 2013, both of which contain the label “for export only”. We find the evidence to be convincing that the goods were clearly destined for the U.S. in accordance with 19 U.S.C. § 1401a(b). However, as [XXX] and [XXX] are related parties, we must determine whether the transaction between them meets the arm’s length requirement set forth in 19 U.S.C. § 1401a(b)(2)(B). According to the decision in Nissho Iwai, in order for a transaction to be viable for transaction value purposes, it must be a sale negotiated at arm’s length, free from any non-market influences. There is a presumption that a transaction will meet this standard if the buyer and seller are unrelated. See T.D. 96-87, supra. However, counsel stated that [XXX] and [XXX] are related persons for purposes of 19 U.S.C. § 1401a(g)(1) since they are a subsidiary and a parent. The transaction value between a related buyer and seller may be considered acceptable if the importation meets either of two tests: 1) the circumstances of the sale, or 2) test values. The circumstances of the sale test is applied on a case-by-case basis. The CBP Regulations at 19 C.F.R. Part 152 set forth illustrative examples of how to determine if the relationship between the buyer and the seller influences the price. See also Headquarters Ruling Letter (HQ) H029658, dated December 8, 2009; HQ H037375, dated December 11, 2009; and HQ H032883, dated March 31, 2010. As provided in 19 CFR §152.103(l), the following circumstances demonstrate that the relationship has not influenced the price actually paid or payable: (1) the price was settled in a manner consistent with the normal pricing practices of the industry in question; (2) the price was settled in a manner consistent with the way the seller settles prices for sales to buyers who are not related to it; or, (3) the price is adequate to ensure recovery of all costs plus a profit that is equivalent to the firm’s overall profit realized over a representative period of time in sales of merchandise of the same class or kind. In this respect, CBP will examine the manner in which the buyer and seller organize their commercial relations and the way in which the price in question was derived in order to determine whether the relationship influenced the price. These are examples to illustrate that the relationship has not influenced the price, but other factors may be relevant as well. In this case, for fiscal year 2013, counsel relied upon the “circumstances of the sale” test and used the “all costs plus a profit” methodology to support the claim that the transaction was at arm’s length. In addition, counsel provided a table of audited financial statements for both [XXX] and [XXX] for fiscal year 2013 which showed [XXX]’s overall operating profit to be 3.12 percent in 2013, and 3.2 percent for [XXX] for sales of the same class or kind of merchandise manufactured exclusively for Mondetta and being sold to [XXX]. In addition, counsel provided the overall operating profit of the related parties for two styles of merchandise at issue in the protest, Style #[XXX] and Style #[XXX]. For Style #[XXX], [XXX] realized an operating profit margin of 8.93 percent as compared to [XXX]’s overall profit of 3.12 percent. For Style #[XXX], [XXX] realized an operating profit margin of 9.52 percent, as compared to [XXX]’s realized an operating profit of 3.12 percent. In applying the all costs plus a profit test, CBP normally considers the “firm’s” overall profit to be the profit of the parent company. Thus, if, as in this case, the seller of the imported goods is a subsidiary of the parent company, the price must be adequate to ensure recovery of all the seller’s cost plus a profit that is equivalent to the parent company’s overall profit. See HQ H272520, dated October 24, 2017, citing HQ 546998, dated January 19, 2000. With this protest, the overall operating margins of the factory, [XXX], exceeded its related middleman [XXX] parent. As a result, we find the transaction between the related manufacturer and the middleman meets the arms’ length requirement set forth in 19 U.S.C. § 1401a(b)(2)(B) for the 2013 fiscal year. However, as there is no evidence of any operating profit margins to evaluate for the 2012 year, we do not find any transactions in 2012 to be arm’s length transactions. HOLDING: On the basis of our review of the documents provided in the record, we find there is sufficient evidence to substantiate that the appraisement of the imported merchandise at issue in the instant protest should be based on the “first sale” price paid by the middleman, [XXX] to its related manufacturer, [XXX]. Therefore, the protest should be APPROVED. This decision is limited solely to the entry at issue, and is not applicable to any other protest matter pending with any port. In accordance with the Protest/Petition Processing Handbook (CIS HB 3500-08A, December 2007, pp. 24 and 26), you are to mail this decision, together with the CBP Form 19, to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with this decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision, Regulations and Rulings of the Office of Trade will make the decision available to CBP personnel, and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution. Sincerely, Myles B. Harmon, Director Commercial Trade & Facilitation Regulations & Rulings Office of Trade